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How to Solve Asset-liability management — Redington immunization conditions Questions on Exam FM

Exam FM Topic: Asset-liability management — Redington immunization conditions Verified Procedural Question
Sample Practice Problem ID: #VV113
At the current yield, which set of local conditions supports Redington immunization of liabilities by an asset portfolio?
(A)Equal present values, equal convexities, and lower asset duration
(B)Equal present values, greater asset duration, and equal convexities
(C)Equal durations only
(D)Equal present values, equal durations, and greater asset convexity
(E)Greater asset present value, equal durations, and lower asset convexity
📖 Worked Solution & Strategy
Reasoning Separate first-order and second-order interest-rate effects. Duration controls the local slope of value with respect to yield, while convexity controls curvature after present values and durations are matched.
Application Redington immunization locally matches value and first derivative (duration), then requires the asset surplus to curve upward, represented by greater asset convexity. Answer The answer is Equal present values, equal durations, and greater asset convexity, option (D).

Final Answer: Option (D)

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